Aurobindo's Veritaz acquisition unlikely to add much value: Analysts

Deal is nonetheless a stepping stone in the drug firm's strategic plan to focus on domestic formulations market, where it aims to have Rs 1,000-cr sales in three years

Hyderabad-based Aurobindo Pharma’s Rs 171 crore acquisition of Veritaz Healthcare is unlikely to add much value to its business. It is nonetheless a stepping stone in the drug firm’s strategic plan to focus on the domestic formulations market, where it aims to have Rs 1,000-crore sales in the next three years.

Aurbindo currently draws over 90 per cent revenues from international markets.

The company’s stock was down 2 per cent to Rs 692.25 apiece on the BSE on Tuesday.

Veritaz is controlled by the promoters of Aurobindo and the deal is a related-party transaction. “The acquisition is being done at arm’s-length price to supplement Aurobindo's plans to enter into the domestic formulations business. It will also provide Aurobindo a platform to market its portfolio of biosimilar products in India,” ICICI Securities noted.

Analysts felt that the ‘underwhelming acquisition’ would add ‘limited value’. Edelweiss analysts said: “While the acquisition looks appealing optically at about 1x of sales and 10x EBITDA (assumed FY22 numbers), we are not quite convinced this can act as a launch pad for growth.”

The brokerage added that Veritaz has not been able to scale in 15-years of operations and was loss making in FY20. Moreover, Veritaz is focused on acute therapy, a segment which has seen high volatility during the pandemic years. Anti-infectives and pain-management are the key therapeutic areas where Veritaz currently operates.

“We will be cautious in extrapolating FY22 numbers considering all acute companies have shown spectacular growth (despite this, the EBITDA margin is only 10 per cent). At this stage we see limited value that this company brings to the table for Aurobindo's domestic ambitions,” Edelweiss said.

The acquisition, however, is not a drain on Aurobindo’s balance sheet, which has Rs 1570 crore net cash.

The deal is also a related party transaction as ICICI Securities pointed out. “Veritaz is a 100 per cent subsidiary of Trident Chemphar Limited, which is owned by RPR Enterprises that is represented by RPR Sons Advisors Private Limited and jointly held by Mrs. P. Suneela Rani, the promoter group of the company. The promoters have so far invested over Rs 80 crore to build the distribution infrastructure and brands,” ICICI Securities noted.

The analysts said that Veritaz revenues grew at a CAGR of 3.4 per cent to Rs 130 crore over FY18 to FY21. The Ebitda break even was attained in FY21. For 9months-FY22, Veritaz revenues stood at Rs 130 crore with Ebitda margin at 9.8 per cent.

Incorporated in September 2006, Veritaz sells branded generic formulations and other healthcare related products in India. It owns 40 brands (acute and critical care segments) and has 180 trademarks registered in its name. Its largest brands are Fepanil and Merogram

group, which had revenues of Rs31 crore and Rs 20 crore respectively in 9MFY22.

It has a pipeline of products to enter into the Cardio-Diabetic and Orthopaedic and Gynecology segments. The company has an existing sales and distribution network with 900 field force, covering more 50,000 retailers with nearly 1700 stockists, presence in 23 cities, reaching out to more than 70000 doctors and empanelled with major hospitals.

In the third quarter earnings call, PV Ram Prasad Reddy, promoter and non-executive director of Aurobindo Pharma had said, “Now this is the time we feel we have the cash flow, and we may get another $200-300 million extra additional cash flow in the next 4-5 quarters. So, this is the time we want to go to either branded or OTC or personal care and all three together, then complete.”

Reddy had said that the time was right to go both organic and inorganic. “First we start with inorganic, and then we want to reach a goal of Rs 1000 crore sales in three years – either organic or inorganic,” he had explained.

The key focus area for Aurobindo which has heavy reliance on exports is to resolve all pending regulatory issues. Owing to the pandemic, it awaits resumption of USFDA inspection in some of its plants which continue to have unresolved regulatory status. Some of these facilities have been inspected and subsequently cleared by other regulatory agencies like EDQM, PMDA, ANVISA

In its FY21 annual report, the firm has said that resolution to regulatory issues is the key focus area along with completion of the phase 3 clinical trials of the pneumococcal vaccine in India.

The firm is thus trying to de-risk the business by enhancing its India focus.